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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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SIPs (Systematic Investment Plans) are goal-oriented, build financial discipline and are a great tool to buy great companies at a reasonably cheap price.
Some people want to travel the world, some want to buy a home, others want to build a retirement corpus. Talk to any financial planner and they will all give you the same suggestion: Start a mutual fund SIP. How can the same financial tool solve such diverse problems?
SIPs are great because they build financial discipline and force investors to think long-term. They help investors understand where they should invest their monies. For example, not all investors would want to invest only in equity mutual funds. They can choose a debt plus equity mutual funds. Diversify into different asset classes. They can choose smaller amounts to invest as well.
The reason you invest in SIPs is simple. SIPs greatly reduce the odds of an investor making poor financial decisions based on emotion or knee-jerk reactions to the stock market. For example: Most retail investors buy high-risk stocks when the market is high. Why? Because they have heard rumours of someone buying a particular stock whose share price zoomed up by 1000% in one month. They want to make quick money too. So they buy the same stock. The problem is they have bought it at its costliest price. And when the stock invariably crashes, they sell it at a loss. SIPs get rid of this whole nonsensical buy high and sell low based-on-emotion phenomenon.
SIPs work on the cost averaging principle. Every stock in the market goes through periods of highs and lows. Your SIP buys stocks worth the same amount at regular intervals irrespective of the price of the stock. The SIP route reduces the average cost per share over an extended period of time. So when your SIP is giving you a negative return, it means your stocks are available at a cheap rate. The correct course of action would be to continue buying via SIPs.
It is possible that you started SIPs at a time when the economy was through a rough patch. For example, if you had started investing in January 2009, your portfolio would have taken a serious hit in September 2009. Your SIPs would have given negative returns. Your Rs. 100 would have become became Rs. 80. You might have panicked and withdrawn your money. This is called ‘loss aversion’. As human beings, we are allergic to losses. It’s natural. But running away is not the answer.
When your mutual funds are losing money, call up your bank or visit them. Talk to an expert. They will ask you questions and get you to think. They will help you understand which mutual fund is right for you, and the benefits you will derive from it. They will also tell you when to exit from a mutual fund. In this instance your finance professional would have told you to continue investing in SIPs and you would have made great returns on your investments from 2009 to 2017.
The biggest advantage with SIPs is that they inculcate financial discipline in investors. Mutual funds require investors to stay invested for a longer duration of time.
SIPs help you harness the magic of stocks without a significant risk or exposure to one portfolio. They are the best example of not putting all your eggs in one basket. It’s perfect for any investor portfolio.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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